Profits up, revenue down as banks lumber along

WASHINGTON — U.S. banks ended 2011 on a roll, a government regulator reported Tuesday, with profits up sharply from a year earlier and over the entire year.

That profit, however, came largely from areas having little to do with new lending, and the falling revenues cast a cloud over the sector.

The nation's banks and thrifts posted a combined profit of $26.3 billion in the final three months of 2011, the Federal Deposit Insurance Corp. said in its Quarterly Banking Profile. That was up 23 percent over the final quarter of 2010.

For the entire year, the nation's 7,357 banks and thrifts enjoyed a combined net profit of $119.5 billion. That was up almost 40 percent from 2010.

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"The only reason that profits increased for the industry as a whole ... is because of the very substantial reduction in loan-loss provisions," said Bert Ely, a veteran and independent bank-sector analyst.

Loan-loss provisions are the sums banks must set aside to guard against bad loans. As the loan portfolios have improved, banks have had to set aside less money, and this helped allow banks to post outsized profits.

The FDIC's acting chairman, Martin Gruenberg, acknowledged as much in opening remarks during the report's unveiling.

"Earnings improvement continues to be driven by reductions in loan-loss provisions," he said. "Fourth-quarter loan loss provisions were $13.1 billion less than a year ago. Also, more institutions are sharing in earnings improvement."

Over the course of 2011, falling loan-loss provisions accounted for almost half of the $170 billion in pre-tax profits reported by banks, said Ely, who said 2012 would show a much more modest profit picture.

Under normal circumstances, expanded lending is what would drive bank profits. But the FDIC report found that bank revenue fell over the entire year in 2011, and the money banks earned on assets that pay interest — credit card loans, car loans, mortgages and the like — had the first complete-year drop since Richard Nixon was president in 1971.

Similarly, bank revenue for the sector fell in each quarter of 2011, only the second time that has happened since 1938, when the nation was nearing the end of the Great Depression.

Improving asset quality has helped bank profits, said Gruenberg. It's a polite way of saying banks have written off a ton of junk loans.

"The industry has charged off more than $100 billion in bad loans in each of the last four years," the acting FDIC chief said. "During that time, banks have set aside more than $660 billion in provisions for loan losses."

The number of loans that are behind on payments has fallen steadily over the past two years, the FDIC said, but the "noncurrent" rate remains higher than it was at any point in the 1980s and 1990s. Real-estate loans make up 87 percent of the delinquent loans, an all-time high according to the agency.

In a positive sign, loan balances rose by $130.1 billion in the final quarter of 2011, the largest quarterly increase since the start of the Great Recession in December 2007.

The brightest spot in lending was reserved for commercial and industrial loans, which have increased in each of the past six quarters, the FDIC said. Commercial loans of $1 million or less to small businesses also rose by $2.8 billion, or 1 percent, in the final three months of 2011. A small gain, it nonetheless marked the first time in seven quarters that it happened.

"Banks continue to aggressively seek out business borrowers as companies consider expansion in an improving economy," James Chessen, chief economist for the American Bankers Association, said in a statement about the FDIC report. "Business lending was particularly strong, rising 13.6 percent compared to the same period a year ago."

Offsetting some of that gain, however, loans for real estate construction and development tumbled by 5.8 percent in the final months of 2011, the 15th straight quarterly drop.

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